EADS swings to quarterly profit, sees challenges

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LONDON (MarketWatch) -- EADS reported Tuesday that it swung to a fourth-quarter profit, but the European aerospace and defense giant's cautious outlook weighed on the shares.

EADS (005730) posted net income of 259 million euros ($401 million) compared with a loss of 768 million euros in the year-earlier period. Revenue fell 5% to 11.36 billion euros, hurt by weak aircraft pricing at Airbus.

Earnings before interest and taxes of 395 million euros fell short of analysts' forecasts. EADS blamed the miss on new charges for its A350 XWB program and pricing deterioration. In a conference call with analysts, EADS Chief Executive Louis Gallois called the EBIT results "unsatisfactory." Read sidebar on management concerns over dollar, supply chain.

EADS shares ended 6.8% lower to 16.10 euros - meaning the stock has lost all of its gains from winning a Pentagon contract for air tankers. See Europe Markets.

Delays on several Airbus programs -- including the A380 superjumbo, the A350 XWB wide-body and the A400M military transport aircraft -- combined with a weaker U.S. dollar and significant restructuring costs to wipe out profit at EADS in 2007.

On an annual basis, the company posted a loss of 446 million euros.

Yet Gallois believes the company has turned a corner.

"We are cautious by nature, but I feel EADS is establishing a firm footing on higher ground," he said in a statement.

Dividend, 2008 guidance

The company is proposing a dividend of 0.12 euro a share this year.

"Paying a dividend -- even if it is limited and despite a net loss -- is more than a gesture of appreciation for the shareholders' loyalty: It's clearly an expression of confidence in the outlook for the years ahead, despite the challenges we will have to overcome," said EADS Chief Financial Officer Hans Peter Ring.

In 2008, EADS said it sees earnings before interest and tax rising to 1.8 billion euros and revenue topping 40 billion euros as the group captures about 700 aircraft orders.

Merrill Lynch analysts noted that the EBIT forecast for 2008 fell short of consensus expectations of 2.4 billion euros.

They added that given the dollar's continued weakness, they were surprised that no new cost-saving measures were announced. On the conference call, however, Gallois said that further cost measures are being considered and stressed that the EBIT guidance contains "allowances for planning contingencies."

He also deplored that the company's share price doesn't reflect its long-term value.

"I hope that the investor community will not overlook our long-term value while stressing our short-term issues," he said.

Lower sales at military transport division

Turning to individual divisions, sales at Airbus fell 4% to 6.4 billion euros in the latest quarter. Gallois explained in a conference call with analysts that the top line was hit by the lower pricing of aircraft in 2002, when rival Boeing was making an aggressive comeback. Aircraft makers get paid on delivery. Order and delivery dates can be separated by several years.

Despite the lower sales, Airbus improved its profitability. Its operating loss shrank to 204 million euros from 1.72 billion euros.

At the military transport aircraft business, sales slumped 75%. The division swung to an operating loss of 11 million euros.

The helicopter and space divisions performed better. Both reported rising sales. Operating profit improved at Astrium but slipped at Eurocopter.

The results come barely a week after EADS scored a big win against Chicago rival Boeing
BA, -0.84%
when it snared a $35 billion contract to build a new refueling aircraft for the U.S. Air Force with Northrop Grumman
NOC, -0.69%
Boeing had been widely expected to snare the contract. See full story.

Boeing on Monday said it will file a formal complaint asking the Government Accountability Office to review the U.S. Air Force's decision.

Gallois defended the government's decision to award the contract to EADS. "We have the feeling that the process was very transparent and fair and professional," he said.

"It is not by chance that we won, having won the last five (international) competitions for tankers; that is all I can say," he added.

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